Thursday, September 6, 2012

Malaysia risks credit downgrade if reforms not done, says S&P

Malaysia risks credit downgrade if reforms not done, says S&P

By Leslie Lau
Executive Editor

Malaysain Insider

September 06, 2012

KUALA LUMPUR, Sept 6 — Malaysia’s sovereign credit rating may
be cut if the government does not deliver promised reforms to cut
spending to reduce its fiscal deficits, Standard and Poor’s (S&P)
has said in its latest report on the country, joining other global
ratings agencies in warnings about the strains on the country’s credit
profile.

S&P said reforms the government should look at include the introduction of a goods and services tax (GST) and subsidy cuts.

“We may raise the sovereign credit ratings if stronger growth and the
government’s effort to reduce spending result in lower-than-expected
deficits, as indicated in the 10th Malaysia Plan. With lower deficits, a
significant reduction in government debt is possible.

File
photo of people shopping in Putrajaya. S&P has said the government
should look at introducing a goods and services tax and cutting
subsidies. — Reuters pic

“We may lower the ratings if the
government can’t deliver the reform measures to reduce its fiscal
deficits and increase the country’s growth prospects. These reforms may
include, but are not limited to, the GST and subsidy reforms on the
fiscal side, and private investment and economic diversification reforms
on the economic growth agenda,” said the ratings agency.

Last month Fitch Ratings said in a separate report that Malaysia had
yet to present a convincing plan to tackle the twin fiscal threats of
its federal budget deficit and federal debt.

Fitch also said that data clearly showed public sector-linked
activity had been a key driver of GDP growth for the last four quarters
alongside robust private sector activity.

It said that the ratio of federal government debt to GDP reached 51.8
per cent at end-2011 despite strong GDP growth but barring a further
deterioration in the global economy, the Malaysian government should be
able to meet its 2012 deficit target of 4.7 per cent of GDP.

Fitch added that improving the nation’s fiscal position would be
challenging without significant reform to address the cost of fuel
subsidies, broaden the fiscal revenue base, or reduce dependence on
energy-linked revenues.
S&P’s latest Malaysia report appeared to echo some of those views.
The country’s moderately weak fiscal and government debt profile for
the rating category constrains the sovereign rating, it said.
Putrajaya had made some moves towards cutting subsidies last year,
but political pressure in the run-up to elections have relegated some of
these reforms to the back of the line.
Plans to introduce GST have also been shelved because of fears that
it would cost votes for the ruling Barisan Nasional (BN) government.
S&P said it believed Malaysia’s slow fiscal consolidation stems
from high subsidies and the relatively weak revenue structure.
“Malaysia depends largely on petroleum-related revenues. The
government has been planning to reform the subsidy system and introduce a
goods and services tax.
“However, given the political sensitivities, we expect significant
implementation, if any, would only be after the general election,” it
said.

The agency added that for more than a decade, Malaysia’s economic
growth was partially brought about by large public investments —
sometimes exceeding that of the private sector — and this had adversely
affected the government’s fiscal position.

“However, this pattern might be changing. For example, foreign direct
investments (FDI) seem to have bottomed out. Besides, the recent
rebound of private sector investments was partially due to the
government’s initiatives for the Economic Transformation Programme. If
the trend continues, the Malaysian economy could regain its vitality.”

While the Najib administration’s efforts to help tide the country
over a rocky global economic environment with a longer term goal of
transforming the country to a high-income nation by spending more on
salary hikes and kick-starting large infrastructure projects has helped
boost GDP growth, analysts have noted that its debt has outgrown revenue
since 2007.

Figures from the Federal Treasury’s Economic Reports show that the
federal government’s domestic debt almost doubled in the space of less
than five years — from RM247 billion in 2007 to an estimated RM421
billion in 2011 — far outpacing its revenues which only grew 31 per
cent, or from RM140 billion to RM183 billion, during the same period.

While the Najib administration has vowed not to let federal
government obligations exceed 55 per cent of the country’s GDP, there is
increasing worry that when government-backed loans or “contingent
liabilities” are taken into account, the government’s total debt
exposure has already risen to about 65 per cent of GDP last year.